What to think about before you lend money to a family member or friend

BATON ROUGE, La. (WAFB) - In a time of economic hardship, we might reach out to those who are closest to us. However, there are some questions to ask yourself before you agree to lend money to a family member.

If you want to lend a small loan to a loved one, Laura Smith, President and CRO for the Louisiana Council for Economic Education wants you to picture one striking image.

“A lot of financial experts will say that if you’re going to lend money to a family or friend, then you might as well consider the equivalent of lighting it on fire,” said Smith.

That’s not to say your situation will certainly go up in flames, but the first step is to think worst case scenario if there is no repayment.

“Can you afford to take a match and just light this on fire and still be okay?” said Smith.

Another part of this self-reflection is to think about your relationship with the person.

She said these are questions you may want to consider before signing the check. However, and here’s where things may get uncomfortable, you need to ask the borrower about his or her financial situation. Smith explains you may want to work out terms for the long-haul.

“Just set those things up and put it in writing. I think that sets the expectation for everyone.”

You do have a limit before that informal agreement turns into an official one. Smith said $14,000 is the mark to start paperwork with the IRS. And if you want to avoid the loan angst all together, maybe gifting the money is an option.

“If you consider it a gift, then it’s a gift, then there’s no worries. That may be safer for the relationship, in some cases,” said Smith.

Navigate your money conversations so everyone is on the same page.

Smith also said studies show these informal lending agreements go south almost fifty percent of the time. So, she stressed the importance of asking a financial advisor or CPA for advice.